Strategist, entrepreneur and commentator Craig Coogan examines issues with his unique perspective. NOTE: The views expressed in this blog are of the author (Craig Coogan) alone. They do not represent any organization, client, or business that he may be associated with. You are welcome to comment below. Thank you for reading!

Thursday, May 22, 2014

Government Motors: gone but not forgotten

I’m a car aficionado. Every three years I upgrade to a new
vehicle. In my younger days (working in for-profit) I was able to do so every
18 to 24 months. Leasing enables my habit. Only in the past decade have I
become brand loyal and consistent. Before
these Honda days I’d go from a Chevy to a sporty Z to a Jeep. Negotiating a car
deal never intimidated me. I remember my Dad and I co-negotiating a Datsun back
in the 1970’s when I was a pre-teen. I think I’ve helped on every car buy my
folks had since then – mortifying my mother when I suggested a better deal could be had with the dealer who happened to be the Church Warden
that she served with. Needless to say, Mom was right and a fair deal ensued and that car has served her well for nearly a decade. Neither
George W. Bush nor Barak Obama negotiated a good deal in “saving” GM. A TARP report
came out this week stating that U.S. taxpayers lost $11.2 billion on the deal.

How is that possible? Didn’t GM pay back the U.S. in full? In
2008/09 when the economy was in a freefall, the Bush administration agreed to “bail
out” the automaker as it went through a structured bankruptcy. When President
Obama’s team came into office $50 billion in taxpayer funds were allocated - approx.
$8 billion as a loan and $42 billion as stock in the “new” GM. In 2010 then CEO Ed Whitacre ran a series of newspaper and television ads touting that GM had “paid back” the loans, with interest, in full, “five years
ahead of schedule.”

The promotional campaign did wonders for the public’s
perception of the company. Confidence in the company soared and sales started
increasing. There’s disagreement on how GM “paid” the funds back. It appears
that the funds the Government used to bail out the company were used to repay
the government. Per Wikipedia: “Some Republican congressmen were
critical of the statement that GM had repaid the loan from TARP calling it a ‘lie
to the American people’. They say the money for the loan repayment came from
other bailout funds housed in an escrow account belonging to the company.” Regardless of the accounting trick - the loan portion was paid back, but the disproportionate share of the bailout was in capital.

The bulk of U.S. taxpayer investment came in the form of the
cash being converted into stock – so much so that the moniker “Government
Motors” took hold. Over the past several years since the “new” company went
public the U.S. has been selling its stake in the company – to appease people
like me who don’t think the Government should have ever been shareholders in the
first place. The rate at which the stock was sold compared to the value of the
stock on the open market resulted in the lost $11.2 billion. It would be
disingenuous to complain about the loss without recognizing that if there wasn’t
a loss then the government would continue to be a major stockholder - also a problem. I can’t
have it both ways – a profit and no ownership because the underlying financial
model never justified the capital investment by the Government in the first
place. The solution, of course, would have been to let the market sort out the
problems in 2008/09. Some would have lost jobs, but other companies would have
bought the brands, reorganized, etc. The political will just didn’t exist.

Since the 2008 bailout (6 years) the Government has
installed 5 different CEO’s at the company. The company in 2013 was the #1
seller of cars in the U.S. with nearly 18% of the market, moving 2.7 million vehicles.

This week the company has recalled another 2.4 cars – making the total 13.6 million cars in the U.S. (15 million
worldwide) needing to be repaired at a cost estimated at nearly $2 billion. The
2004-2008 model years are the defective cars...perhaps one of the reasons the company was going under?

The U.S. Government last week fined the company the maximum amount of $35 million for the delay in issuing the recalls. Not for having dangerous cars that have killed people - but for not recalling and fixing the cars quickly enough. The irony of this action is rich. During
the years that the U.S. was the single largest shareholder of the company and the
Obama administration was rotating CEO’s in and out there was a significant delay in issuing
recalls on vehicles. In various Congressional hearings this nugget seems to
have been lost: days after the U.S. exits its role as investor it returns to
its role as regulator to punish what it oversaw as principal shareholder.

I never supported taxpayer money bailing out a private company.
History has shown that letting poorly run entities die and be reinvented by
competitors or allowing entrepreneurs to
take troubled assets in new directions yields the best economic and social results.
There is short term pain but long term success. It is the basis of capitalism.
Instead, President Bush said “I’ve abandoned free market principles to save the
free market.” The legacy of Government Motors is a fine for not running the company
properly, let alone the people who died as a result of driving the “deathtraps.” Oh, and let's not forget $11.2 billion.